The Court of Appeal has often had to consider whether a defendant can challenge an assignment by a liquidator of a cause of action against him on the grounds that the assignment is designed to enable the action to be pursued with the benefit of legal aid.

With one exception, the court has declined to interfere in such cases, even if the assignee is a former director or shareholder who, unlike the company, is entitled to public funding.

Help is at hand following the amendment to reg 33A of the Civil Legal Aid (General) Regulations 1989, which came into force on 1 June 1996, pursuant to SI 96/1257.In Advanced Technology Structures v Cray Valley Products [1993] BCLC 723, the Court of Appeal struck down an assignment of claim to a legally aided individual made where the liquidator was to receive part of the recoveries.

They hoped to create a sham to enable the company to continue the action using public funds.

Subsequent decisions have taken a different course.

In Eurocross Sales v Cornhill Insurance [1995] 1 WLR 1517, it was held that, even assuming that the assignment was made to an individual who was eligible for legal aid, it could not be inferred that the assignee was to conduct the action on behalf of, or for the benefit of, the company.

It was for the Legal Aid Board (LAB) to judge whether the grant of any application made to it by the assignee would be unreasonable and, if so, to refuse it.

Similar results were reached by the Court of Appeal in Norglen Ltd v Reeds Rains Prudential [1996] 1 All ER 945, Levy v ABN Ambro Bank (1995) 24 November (unreported) and, most recently, in Circuit Systems v Zuden v Redack (1996), 29 March, (unreported).

In Circuit Sytems, Simon Brown LJ recognised that '...

impecunious companies (and indeed, on occasion, their liquidators, shareholders, creditors and, perhaps, other interested parties) can, and doubtless often will, in future seek to litigate their claims at public (and their opponent's) expense, by assigning them to a suitable person eligible for legal aid, such being the very object of the assignment.' Although the Court of Appeal observed that the LAB would be entitled to refuse legal aid, the cour t had no power to strike down the assignment as invalid.Major changes are likely with the new reg 33A, entitled 'Refusal where assignment made to obtain legal aid'.

This provides that, without prejudice to reg 28, an application may be refused where it appears to an LAB area director that: '(a) any cause of action, in respect of which the application was made, has been transferred to the applicant by assignment or otherwise from a body of persons corporate, or uncorporated, or by another person who would not be entitled to receive legal aid; and (b) the assignment or transfer was entered into with a view to allowing the action to be commenced or continued with the benefit of a legal aid certificate.'This new regulation came into force on 1 June 1996.

While reg 33A does not oblige area offices to refuse legal aid in circumstances where it applies, they are now 'entitled to and should take a firm line in these cases and refuse legal aid on this ground'.

The regulation only applies where the assignment took place with a view to allowing the action to be commenced or continued with the benefit of legal aid.

This is a welcome development for those who think that the practice of assigning a defunct company's claims to an impecunious individual is capable of abuse.

Reg 33A should ensure that this practice will be halted.

It does not deal with other problems that defendants to such claims often encounter, such as where the assignment is made with a view to avoiding a security for a costs order against the insolvent company.

However, in Freightex v International Express Co (unreported), it was highlighted that it is often the case that a defendant would be better off against the substituted plaintiff than against an insolvent company.

This issue was raised in Norglen.

Although the court ruled that the assignment was not invalid if its object and effect were to enable the assignees to sue without having to put up the security that the defendants were entitled to from the liquidator, this may be reconsidered by the Law Lords.